The company emerges from economic downturn and braces for new challenges.

Oleg Deripaska, the Chief Executive Officer of the RUSAL aluminum production giant, received a bonus in the form of 0.33 percent of the company’s shares of stock (valued at USD 70 million) after RUSAL’s initial public offering on the Hong Kong Stock Exchange. The company was very well prepared for the stock exchange listing after it showed strong performance results for 2009.

RUSAL’s profits last year surprised analysts in the financial sector. Net profits amounted to USD 821 million in 2009. The company experienced net losses of USD 5.98 billion in 2008.

The company is now looking to its future construction projects at the Taishet smelter and the Boguchany smelter. Investment figures for the first project are estimated at USD 1.16 billion, while the second smelter is expected to cost USD 1.47 billion. RUSAL also intends to resume its production activities at its Ewarton aluminum plant, a division of Windalco based in Jamaica. Moreover, the company has recently launched three new product categories at its household aluminum foil manufacture at the Sayanal plant.

IPO

Oleg Deripaska received a lucrative award for putting together the initial public offering of RUSAL at one of Asia’s largest stock exchanges, the HKSE.

RUSAL’s chairman received 50 million 625 thousand shares of the company’s stock, equivalent to 0.33 percent of total shares issued. The stock was worth USD 70 million when the shares were placed on the market. RUSAL also gave 6 million 26 thousand shares, equivalent in value to USD 8.3 million, to other members of its senior management.

Profit

The company’s profits in 2009 stood at USD 821 million, representing a robust recovery after RUSAL’s losses in 2008. In 2008, the company’s books were more than USD 5.98 billion in the red. In 2009, sales revenues were USD 8.165 billion. The revenue indicator actually went down by 48 percent compared to the corresponding figure for the previous year. EBITDA decreased 83 percent to end at USD 596 million.

Losses incurred in RUSAL’s operations have been approximately 63 million in 2009. In 2008, operating losses were USD 1.228 billion. The operating margin figure for 2009 was minus 1 percent, compared to 8 percent a year earlier.

The company’s “unexpected” profit is attributable to RUSAL’s ownership of stock in associated metallurgical companies. RUSAL’s holds USD 6.7 billion worth of stock in Norilsk Nickel. Over the course of 2009, the value of RUSAL’s stocks of Norilsk Nickel (one-quarter of the latter company’s stock) rose by more than 120 percent.

The decline in sales can be explained by reduced purchases of aluminum and aluminum alloys. In 2009, sales accounted for 83 percent of profits, while in 2008 for 77 percent. The price on aluminum products also went down last year.

The company decreased production in 2009. Aluminum production went down by 11 percent to 3.9 million tons. Alumina production decreased 36 percent, ending at only 7.3 million tons. The volume of bauxite extraction went down by more than 40 percent to end at 11.3 million tons.

London Metal Exchange prices for aluminum averaged only USD 1 668 per metric ton. The price in 2008 was 35 percent higher. While the actual sales of aluminum decreased by 8 percent, leveling off at 4.069 million tons, the revenue from the sales dropped by 44 percent, amounting to USD 6.77 billion.

The cost associated with producing aluminum went down more than 20 percent in 2009. Production cost held at USD 1 471 on the average throughout last year. Alumina production expenses went down 27 percent to USD 347 per metric ton.

Altogether, processing and sales expenses decreased by 39 percent to USD 6.71 billion. RUSAL also benefited from the decline in electricity costs. Electric power costs went down 8 percent over the course of the year, and RUSAL’s electricity bill was at USD 1.88 billion.

The company reduced administrative expenditures by more than one third – to USD 713 million in 2009 from USD 1.1 billion in 2008. RUSAL also reduced its labor force by 16 percent, or 14 000 employees. The company now has only 75 800 workers.    

In 2009, RUSAL also experienced a sharp decline in capital investments. Expenditures dropped by a whole 82 percent to a meager amount of USD 239 million. The plan for the company’s debt restructuring contemplates that any new investment activities be authorized by RUSAL’s creditors.

According to Oleg Deripaska, RUSAL enhanced its standing on the balance sheet by arranging a

USD 16.6 billion restructuring plan with over 70 different lending institutions. The company’s preparation for the IPO also strengthened RUSAL and reaffirmed its position as the market leader.

Other financial experts and bankers, however, think that the picture is somewhat more complex. The EBITDA figure and and the volume of net profits were a surprise to most market observers. At the same time, the USD 821 million profit was realized not exclusively from the company’s primary business operations. RUSAL received USD 1.417 from the stock it held in associated metallurgical companies and got a USD 1.209 gain as a result of restructuring its debt. The company also suffered a loss of USD 570 million as a consequence of a long-term electricity supply contract, which it was obligated to follow.

RUSAL’s total debt figure, including the amount the company owed to Onexim was USD 12.9 billion as of February 2010. The company is under an obligation to repay USD 3.3 billion before 2014.

Another bright spot in RUSAL’s operating statistics, according to Troika Dialog, is that the company generated a healthy cash flow – RUSAL got in more than USD 1.3 billion from its various activities.

Credit Suisse was also surprised by RUSAL’s profit, although company operations did conform to analytical forecasts. Credit Suisse projected RUSAL’s profit for 2009 to be USD 555 million.

New smelters

The Russian aluminum producer is now searching for financing arrangements to finish construction at the Taishet Aluminum Plant in Irkutsk region, a project that is expected to require 1.156 billion in investments. Expenses associated with completing the work on the Boguchany smelter in Kransoyarsk territory are calculated at USD 1.469 billion.

Construction activities at the Taishet Aluminum Plant and the Boguchany smelter were temporarily halted in 2008, after the price on aluminum plundered. RUSAL already spent USD 251 million on the Boguchany project and USD 495 million for the Taishet plant. First stage production facilities at the Taishet plant are now 60 percent complete, while Boguchany production facilities are only 30 percent complete.

Windalco

RUSAL has plans to resume production at the alumina plant at Ewarton (division of Windalco of Jamaica). The plant’s operations were suspended in March of 2009. The volume of production will reach 650 million tons of alumina a year if the full production capacity is utilized. In 2010, the plant will be expected to process around 321 million tons. The decision to launch the alumina plant is still subject to the approval of the creditors of RUSAL located in countries other than Russia.

Mr. Deripaska, for one, is confident that the stabilized situation on global markets, together with the favorable business climate in Jamaica, will ensure the success of the Ewarton facility.

The company’s plans include increasing alumina production by 11 percent year – all as a result of the steady work of the Achinsk Alumina Refinery, the Bogoslovsk Alumina Smelter, the Urals Alumina Smelter, alongside renewed processing activities at the Boksitogorsk Alumina Refinery, the Aughinish plant (Ireland), the Friguia plant (Guinea), the Nikolayev Alumina Refinery (Ukraine), the Queensland alumina plant (Australia), as well as Windalco (Jamaica).

RUSAL also considers the possibility of increasing production at the Windalco Kirkvine Works if the demand for aluminum products continues to rise. In 2009, the Windalco plants cut production by 87 percent to only 153 000 tons of aluminum in 2009.

The company’s assets in Guinea also constitute a significant component of RUSAL’s operations. From April 2010, however, Guinea divisions operated at a fraction of their capacity due to labor strikes. RUSAL is nevertheless confident that the labor disputes will not impact the company’s production plans.

Inert anode project

The state-owned Rusnano corporation is planning to invest RUR 1 billion in a project for creating inert anodes, according to Viktor Mann, who heads the technological development of RUSAL. RUSAL plans to provide additional funds for conducting research activities. According to RUSAL’s officials, the project will be realized soon.

RUSAL intends to register its inert anode company in either Krasnoyarsk or Moscow. RUSAL and Rusnano will agree on their relative stakes in the venture. The production line for inert anodes will be organized at the KrAZ Smelter of RUSAL. About half of all production volume will be used by RUSAL in carrying out the company’s operations. The second half will be sold. The line will become operational in 2016 – 2017.

The chief purpose of developing inert anode technology for RUSAL is to heighten the environmental efficiency of the company’s smelters. As a consequence, operating expenses for the production plant would be greatly lowered. The KrAZ smelter, in particular, stands to save USD 200 million per year from using the new technology. Building new smelters that are designed to use inert anode technology would cost roughly 30 percent less than constructing traditional smelters.

Foil products

The company has also added new products to its household aluminum foil product line at the Sayanal plant in Khakassia. Three new product categories were introduced. Additional products that have been added include economy class foil, heavy duty foil, and a professional kind of foil to be used by restaurants. The economy brand foil will cost about 16 percent less than any other type of aluminum foil manufactured by RUSAL. RUSAL will work in association with Metro Cash&Carry to market professional foil and heavy duty foil. The plant at Sayanal, which was launched in 1995 with the participation of Italy’s FATA and the U.S.-based Reynolds Metals Company, produces over 70 percent of aluminum foil consumed in Russia. Production is exported to more than 30 countries.